The Investor Class

The Investor Class

Published On: March 21, 2018

Written by: Ben Atwater and Matt Malick

The Investor Class

51.8% of American households have no equity holdings, while the other 48.2% of us own stocks.  Stock ownership is more prevalent (89%) in households with incomes above $100,000.

Stock investments – as you might imagine – are skewed toward the richest.  The wealthiest 10% of U.S. households own 84% of all stocks and the top 1% own 40% of all stocks.

During the most recent earnings season, share buybacks (the amount companies repurchased for themselves) averaged $5.8 billion per day, an all-time record.  In February alone – in the heat of the market correction – companies repurchased $113.4 billion in stock. Goldman Sachs estimates that S&P 500 companies will repurchase an aggregate $650 billion worth of shares this year thanks in large part to recent corporate tax cuts.

Additionally, Goldman forecasts that S&P 500 dividends will hit $515 billion in 2018.

That’s nearly $1.2 trillion that will flow to the investor class.

Anecdotally, since the 2000 market peak, five Dow Jones Industrial Average stocks have repurchased enough shares to lower their shares outstanding by more than 40% (McDonald’s (41%); IBM (47%); Home Depot (47%); Visa (53%); Travelers (61%)).  With the exception of IBM, these stocks have enjoyed returns well in excess of the S&P 500’s gains over this time period.

Apple, alone, may authorize as much as $60 billion in buybacks this year. Although companies could be set to accelerate the repurchase trend in 2018, this dynamic is nothing new.

Not only are there generally fewer shares of existing companies on the market, there are also fewer companies, in aggregate, listed on U.S. stock exchanges.

Since the 1997 peak, when 9,113 companies traded, the number of listed companies has fallen to about 5,700.  All the while, in the ten years since 1996, investors have added more than $10 trillion of assets under management to U.S. equity funds.

How meaningful are the trends of buybacks and fewer listed companies?  To be honest, none of us really know, rather we can only guess how these forces have impacted markets, the broader economy and the investor class.

Clearly, healthy demand and decreased supply, all other things being equal, would have boosted share prices.  The continued flow of money into equities and their dwindling supply should be good things for equity investors.  However, as public companies spend so much cash shrinking their share count, perhaps the economic pie shrinks as well?

Many critics have pointed out that the more companies spend on share buybacks, the less money they theoretically have to invest in capital, which would expand productivity and overall growth.  Since the great recession, GDP growth has been below trend, largely as the result of lower productivity.  This phenomenon may have something to do with the large amounts of cash companies have used to buy back their own shares instead of investing in technology, research and development.

A large number of mergers and private equity takeovers have also resulted in fewer shares traded as one company buys out another.  Again, this can result in reductions in aggregate growth as companies fire redundant employees and shutter overlapping assets while paying vast sums of money to shareholders, debt holders, bankers, lawyers, accountants and consultants.

Additionally, less companies come to market today because private equity is flooded with cash and is committing about $200 billion per year to private markets.  Private equity has $2 trillion in assets and about $700 billion of cash ready to deploy.

During the last tech bubble, a major American company simply needed to be on the public markets.  That is not the case these days.  Uber, as an example, is estimated to be valued in excess of $60 billion as private equity fuels the ridesharing company.

With the Federal Reserve maintaining a $4 trillion balance sheet and the new Trump tax cuts adding another projected $1.5 trillion to the economy, there is no shortage of cash swirling around.  Much of this stimulus is getting handed back and forth among the investor class.  This cycle has certainly been a boon for the affluent.

This phenomenon has created a lot of capital seeking out a limited number of opportunities and has resulted in higher and higher asset prices – whether it be stocks, bonds, real estate, private equity, etc.

While this has been a great thing for the investor class, it’s wise to be cautious as to how long the trend can sustain itself.  We continue to believe that diligence and patience are becoming ever more important as we have seen increased volatility thus far in 2018, while most risk assets still sit at sky-high valuations.  As markets await an anticipated breakout in aggregate growth, volatility will increase or decrease depending on whether that growth materializes.

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